Training for Adverse Selection

We study training provision in environments where employers privately observe employee performance and thus derive information rents. Training impacts not only overall productivity, but also the extent of adverse selection, and, thereby, the way surplus is shared: firms or workers may strategically over-invest in training to increase their share of the pie. Going beyond the traditional distinction between general and specific training, we highlight how various kinds of training generate different incentives: workers aim at curbing adverse selection and therefore invest in remedial training that primarily benefits the least able or guarantees minimal skills; conversely, firms focus on excellence-oriented programs that boost the productivity of the most able and promote organizational practices that increase match-specific productivity. More generally, the paper highlights how the design and composition of training programs—and their interaction with other HR practices—shape turnover, wages, and firm performance through the adverse-selection channel.